USD/JPY refreshes annual low below 140.00 in monetary policy-packed week

• USD/JPY slides sharply to near 139.50 with all eyes on the Fed policy.
• Market expectations for Fed large interest rate cuts have strengthened.
• The BoJ is expected to leave interest rates at 0.25% on Friday.

The USD/JPY pair posts a fresh annual low at 139.50 in Monday's North American session. The asset weakens ahead of the monetary policy decisions by the Federal Reserve (Fed) and the Bank of Japan (BoJ), which will be announced on Wednesday and Friday, respectively.

The market sentiment remains cheerful as the Fed is almost certain to pivot to policy-normalization from Wednesday. This would be the first interest rate cut decision by the Fed in over four years since it announced the battle against rising inflation due to pandemic-led stimulus.

Meanwhile, the debate over the Fed's likely interest rate cut size has taken a U-turn. Market expectations for the Fed reducing interest rates by a big margin, which were significantly lower last week before the release of the United States (US) Producer Price Index (PPI), have strengthened. The CME FedWatch tool shows that the probability of the Fed cutting interest rates by 50 basis points (bps) rose to 65% from 30% a week ago.

The US PPI report showed that the annual headline producer inflation decelerated at a faster-than-expected pace to 1.7%, the lowest in six months.

Apart from the interest rate decision, investors will also focus on the Fed's dot plot, which will indicate interest rate projections for different timeframes by all officials. The CME FedWatch tool also shows that the central bank will cut interest rates atleast by 100 bps this year.

In the Tokyo region, investors see the BoJ keeping interest rates steady but maintaining hawkish guidance on sustaining inflationary pressures and growth prospects. The BoJ has pushed its interest rates to 0.25%. Analysts at Standard Chartered see the BoJ interest rates rising to 0.5% by the year-end. The confidence of market experts has increased due to inflation remaining above 2% for the past 21 months.